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5 Concrete Ways To Improve Nonprofit Financial Health

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Once any person associated with the nonprofit world reads the extremely revealing and recently released Oliver Wyman report entitled: “The Financial Health of the United Stated Nonprofit Sector,” they will be seeking actions to alleviate most, if not all of the key findings outlined below if any of them apply.

Any single one of the findings below would be a call to arms for any commercial business and should not be taken for granted or considered just the status quo for the charity sector.

  • Some 7-8 percent of U.S. nonprofits are technically insolvent, with liabilities exceeding assets.
  • 50% of U.S. nonprofits are operating with less than a SINGLE month’s cash reserves
  • Restoring these nonprofits to solvency would require an infusion of $40-$50 billion.
  • Some 30 percent of the country’s nonprofits have lost money over a three-year period.
  • Size does not seem to affect financial health. Larger organizations are as likely as smaller ones to be financially unstable.
  • Financial health varies according to business model.
  • Nonprofits that depend on government contracts and fee-for-service revenue use debt more often, operate in a tighter liquidity range, and have smaller reserves.
  • Nonprofits that are more reliant on private philanthropy have less debt and larger reserves.

Each of the above taken by themselves might warrant the word “crisis,” together they should be a wake up call for nonprofit leaders, board members, funders and major donors.

I personally have worked with senior leaders of nonprofits for the last 35 years and have had the privilege of also serving on the boards of over two dozen charities. During the course of reading the report I filled the margins with numerous notes and concepts of possible actions to suggest.

From those notes, I have pulled the top five actions I would bring up at the next board meeting of any nonprofit where we found any of the key findings to be the case. Here they are in the order they came out in my notes.

1. Create and Use a Strategic Plan

A proper strategic plan that can and will be utilized is essential to solving most financial shortcomings. Such a plan will keep everyone within and associated with the organization going in the same direction. Perhaps, more importantly, it will keep missteps to a minimum.

Time and time again, I see small and even medium size nonprofits trying to operate without a strategic plan. The mere act of pulling all the key players together to create a proper strategic plan can be a game changer for such organizations.

2. Recruit Board Members with Successful Track Records

Being held accountable for creating and using a strategic plan usually comes from the involvement of board members with successful track records. I am not referring to success in general, although that is almost always helpful.

What is being referred to is success with other similar size organizations where such problems as cash reserves or balance sheet issues exist. More to the point, they have been influential is addressing such problems. They also know what parts of a strategic plan such as a proper mix of fundraising options must be in place to correct financial issues and/or keep them from occurring.

3. Create a Culture of Philanthropy

If any of the findings above are part of the financial picture of your charity, then creating and maintaining a culture of philanthropy will most likely be critical to eradicating those problems leading to such findings.

Even if your charity has always been funded by grants or fees for service, when financial issues arise proper fundraising may be the only solution!

Successful fundraising can only be achieved on an ongoing basis with a true culture of philanthropy surrounding your organization. If you are not aware of what a culture of philanthropy is additional research and proper training should be pursued.

4. Be Positioned to Take Advantage of Opportunities (12 month Reserve)

When actions 1-3 above are achieved then a correct financial reserve of at least 9-12 months will soon be place.

Such a reserve is not only created to cover potential revenue shortfalls, but can be a great manner to fund a game changing opportunity. Sometimes, opportunities come along that when evaluated and endorsed by the organization’s leadership may be too valuable to ignore.

Too often, such opportunities must be passed up due to no avenues of funding them. A proper reserve can therefore serve both purposes.

5. Avoid Mission Creep

Once again, a true strategic plan and a strong and experienced board will need to be in place to avoid the last action step.

This might seem ironic to mention an action step that is actually avoiding something, especially when #4 refers to taking advantage of game changing opportunities.

Mission creep and the disasters it can cause are often confused with true opportunities. This is where the strategic plan and experienced leadership must both play a part in distinguishing between the two!

Funders who are not willing to support overheard or anything but exciting new projects often cause mission creep. Unfortunately, those exciting new projects are often the cause of many of the report’s findings listed above.

Those are my five concrete actions.

Did my five align with yours as you read the report? Were there others that come to mind? If so, please share them and your comments with us.

I sincerely hope the above actions are never needed by your nonprofit organization. However, should any of the findings of the report ring true for your charity then please suggest as many of the actions as plausible at your next board meeting.

Bloomerang has created a key tool to help with avoiding the findings listed above and to provide a foundation for several of the five action steps. It is called the Sustainability Scorecard.

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  • Michael F Cade

    Great recommendations Jay, several of these items would be on my list of ways to help nonprofits improve. In addition, it is critically important for nonprofits to remember that it is not just about the numbers. Bad things happen when organizations swing too hard and focus too much on finance or too much on strategy. There is a balance that needs to be struck between performance today and long term viability and relevance. That balance also needs to be achieved between financial results and service delivery. Of your list, number 4 is my favorite. Being ready, financially, strategically and culturally to embrace opportunities is a capability I find sorely lacking in many nonprofits. This can spring from over-reliance on the operating budget or risk aversion at the Board level or the inability to distinguish a sound opportunity from a bright shiny object. Thanks again for sharing your expertise and pointing readers toward Wyman's report. There is s lot of information that nonprofit leaders need to know.
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